EDWARD R. HAMBERGER, PRESIDENT & CEO, ASSOCIATION OF AMERICAN RAILROADS

In 2007 freight railroads averaged 436 miles per gallon. That is to say, we on average moved one ton of freight 436 miles on one gallon of fuel.

But ultimately, at the end of the day it all comes down to money. We are going to have to invest to expand capacity, and we’ve been doing that. Since 1980 the industry has spent $420 billion on infrastructure and equipment. That includes maintaining and expanding the infrastructure. That is 40 cents out of each revenue dollar goes into capital expenditures or maintenance expenditures.

To place that into perspective, each of the two largest freight rail companies spends more to maintain and improve their track and roadway than all but three of Secretary Glynn’s members at AASHTO spend on their State highway programs.The next two largest railroads would be ranked in the top ten in comparison to what an individual State spends on its highway network. The ability of the railroads to continue investing obviously will depend upon their ability to make an adequate rate of return. As the Congressional Budget Office noted in its report 2 years ago, profits are key to increasing capacity because they provide both the incentive and the means to make those new investments. In order to meet the projected demand, Cambridge Systematics did a study for the Department of Transportation report which estimated that $148 billion will need to be spent on capacity expansion alone, not maintaining, not replacing, capacity expansion, between now and the year 2035, just to maintain the freight rail market share. The Cambridge Systematics report projects that all of that money will probably not be coming from the freight railroads. We believe that there is a role for government to play because of the public benefits of moving freight by rail. Those benefits include fuel utilization, less CO2 emissions, and obviously congestion mitigation. Because of the public benefits, I would like to suggest a couple of policies that Congress may consider.

A comprehensive, reliable, and cost-effective freight railroad service is critical to our Nation. Today, freight railroads account for more than 40% of U.S. intercity ton-miles—more than any other mode of transportation—and serve nearly every industrial, wholesale, retail, agricultural, and mineral-based sector of our economy.

Looking ahead, the United States cannot prosper in an increasingly-competitive global marketplace if our freight is not delivered efficiently and cost effectively. Having adequate freight rail capacity is critical to this effort. Freight railroads must be able to both maintain their extensive existing infrastructure and equipment and build the substantial new capacity that will be required to transport the significant additional traffic our economy will generate. I respectfully suggest that Members of this Committee, your colleagues in Congress, and other policymakers have critical roles to play. Indeed, a primary obligation of policymakers is to take steps that assist—and, just as importantly, not take steps that hinder—railroads in making the investments needed to provide the current and future freight transportation capacity our Nation requires.

A mix of train types determines the speed and spacing of trains on a track. A corridor that serves a single type of train can usually accommodate more trains per day than a corridor that serves a mix of train types. Trains of a single type can be operated at similar speeds and with more uniform spacing between the trains, in part because they have similar braking and acceleration capabilities. This increases the total number of trains that can operate over a track segment each day.

When trains of different types—each with different length, speed, and braking characteristics—share a track segment, greater spacing is required to ensure safe braking distances and accommodate different acceleration rates. As a result, the average speed drops and the total number of trains that can travel over the corridor is reduced.

Moreover, different train types and customer segments have different service requirements. For example, premium intermodal movements demand high levels of delivery reliability, timeliness, and speed; bulk trains (e.g., coal or grain unit trains) may need consistent, managed service with coordinated pick-up and delivery, but high transit speed is often less important; customers who own or manage their own fleet of freight cars may require railroads to undertake network strategies which help them minimize these costs, such as maximizing the number of annual loaded trips rail cars make; passenger trains require high speed and reliability within a very specific time window; and so on. In addition, a railroad must be able to move empty freight cars through the network in a manner which positions them to provide service based on continually-changing levels of customer demand.

Rail traffic is not uniformly distributed each day, so on some days considerably more than 100,000 carloads are originated. In fact, the carloadings on the heaviest business day of the busiest season may exceed by 40 percent those of the lightest business day of the lightest season. The variance is caused in roughly equal parts by seasonal demand and the five-day work week of most rail customers. These demand variations have a significant impact on rail capacity requirements.

Like firms in every other industry, railroads have limited resources. Their ability to meet customer requirements is constrained by the extent and location of their infrastructure (both track and terminal facilities); by the availability of appropriate equipment and employees where they are needed; and by the availability of funds necessary to augment what they already have.

The constraints railroads face—particularly those involving their physical network—cannot be changed quickly.

It can take a year or more for locomotives and freight cars to be delivered following their order

6 months or more to hire, train, and qualify new employees

Several years to plan, permit, and build new infrastructure

In light of these factors and many more, railroads must design effective operating plans that meet customer requirements within the confines of the physical constraints they face. The complexity of such a plan is enormous. For example, it must incorporate the differing types of demand placed on various portions of a network, as well as the changes in that demand. Sometimes these changes evolve over several (or more) years and are based on changes in underlying markets—e.g., the emergence of the Powder River Basin as the premiere source of domestic coal, the growth of imported goods from the West Coast, or the development of ethanol markets. At other times, these changes are relatively sudden—brought on, for example, by natural events (e.g., floods or hurricanes), economic factors (e.g., export surges due to a weaker dollar), or the loss or gain of traffic flows of a major customer or group of customers through plant openings or closings or the competitive bidding process. Sometimes these changes can be foreseen; at other times, they are wholly unexpected.

A railroad’s operating plan must allocate this demand across a network that has terminal processing constraints (e.g., the number of yard tracks, locomotive facilities, configuration, etc.); line-haul capacity constraints (e.g., number of main tracks and crossover points between them; location and frequency of sidings; types of signaling systems; speed limits; connections with other routes; etc.); locomotive availability (e.g., the number, their horsepower, availability of support facilities for fueling and maintenance, etc.); and employee constraints (e.g., number, location, crew support facilities, equipment maintenance and servicing personnel, etc.). On every major railroad, all of these factors must be combined to develop a plan to move traffic safely and efficiently 24 hours per day, every day of the year. Unlike airline networks, where the period after midnight can usually be used to recover from the previous day’s problems, a rail network operates 24 hours a day. Thus, incident recovery must be accomplished while current operations are ongoing.

Sophisticated computer models are available to assist in the network planning process. However, these simulation results must be interpreted and validated by knowledgeable railroad personnel who use their judgment and experience as to what works and what does not. Because of its complexity, the development of a new network operating plan to accommodate substantially-changed conditions typically takes months or years, not days or weeks.

The need for safe operations trumps everything else, and proper line maintenance is essential for safe rail operations. However, the need for maintenance adds still another level of complexity to rail planning. In fact, because of higher rail volumes and a trend toward heavier loaded freight cars, the maintenance of the rail network has become even more important. Railroads have no desire to return to the days when maintenance ‘‘slow orders’’ (speed restrictions below the track’s normal speed limit) were one of the most common causes of delay on the rail network. That’s why one of the most important parts of any railroad operating plan is the accompanying maintenance plan with which it is integrated, and minimizing the impact of maintenance disruptions on rail operations is one of the major reasons for the additional main track capacity that is being added to the rail network today.

Terminals and their operation are another key consideration for preserving fluidity in a rail network. A train may operate without delay over a segment of main line. However, if it cannot enter a terminal due to congestion, then it must remain out on the main line or in a siding where it could block or delay other traffic. The ability of a terminal to hold trains when necessary and to process them quickly is one of the key elements in preventing congestion and relieving it when it does occur. Thus, one of the most important factors in increasing capacity for the rail network is enhancing the fluidity of terminals. Unfortunately, terminals are often one of the more difficult areas in which to add capacity. They are frequently in, or near, urban areas. Expansion generally means high land cost and, potentially, high mitigation costs. Even in less urban areas, a rail terminal is rarely considered positive by nearby residents, and its development or expansion to accommodate freight capacity growth is usually the subject of intense debate.

Four-Stage Railroad Capacity Upgrade Process

Railroads typically have four stages in the process of upgrading their capacity. They are explained sequentially below, but in actual practice tend to be used in parallel:

Identify and implement process changes that can enhance capacity. This includes a wide variety of steps, such as redesigning the railroad’s transportation and operation; redesigning, negotiating, and implementing new interchange plans with connecting railroads; redesigning yard and terminal operations; working with customers to improve their inbound or outbound flow processes; changing a maintenance plan; redesigning the process utilized to inspect and maintain equipment, rethinking and implementing new freight car distribution strategies; and redeploying locomotives for more effective utilization. Some of these process improvements can be designed and implemented in weeks or months. Others may require a year or more.

Develop and deploy improved information technology and processes for utilizing that technology. This includes improvements in such areas as dispatching and control systems; terminal management systems; maintenance planning systems; transportation planning systems; work assignments; locomotive and freight car monitoring; track defect identification and diagnostic systems; and locomotive maintenance management systems. Some of these improvements too can be implemented in only a few months, while others are more complex and may take several years to develop and implement.

Acquire and deploy assets that can be used ‘‘flexibly.’’ This includes assets such as locomotives, freight cars, and higher-capacity maintenance machinery. These items are not restricted to any particular portion of the rail network, but can be deployed where and when needed. Trained employees are perhaps the most important of the ‘‘flexible’’ assets. Equipment usually requires at least 6 months to acquire, often after many additional months of planning and design; employees usually require at least 6 months to train.

Adding more infrastructure, or ‘‘iron in the ground.’’ This represents long- term assets that, once in place, cannot be redeployed elsewhere. Usually, they take at least 1 year to deploy, and frequently take three to 10 years to plan, design, permit, and build. These include projects such as main line capacity additions (e.g., new main tracks, sidings, and signal systems); new terminal capacity (e.g., intermodal and automotive terminals, freight classification yards, locomotive and freight equipment repair and servicing facilities); large scale upgrades of choke points in urban areas (such as the Alameda Corridor and the series of Kansas City ‘‘flyover’’ projects); new customer access routes; major bridge additions or rebuilds; improving tunnel clearances; and improvements in connectivity between different portions of the rail network.

The massive investments railroads must make in their systems reflect their extreme capital intensity. Railroads are at or near the top among all U.S. industries in terms of capital intensity. In fact, from 1997 to 2006 (the most recent year for which data are available), the average U.S. manufacturer spent 3 percent of revenue on capital expenditures. The comparable figure for U.S. freight railroads was 17 percent, or more than five times higher. Likewise, in 2006, railroad net investment in plant and equipment per employee was $662,000—nearly eight times the average for all U.S. manufacturing ($84,000).

The 4 largest Class I railroads spend far more on capital outlays and maintenance of track and roadway than the vast majority of state highway agencies spend on their respective highway networks. For example, only the highway agencies of Texas, Florida, and California spend more on roadway capital and maintenance than Union Pacific and BNSF each spend on their networks. CSX and Norfolk Southern are in the top ten compared with all states.

The benefits of increased efficiency can be seen through the results of rail efforts to ‘‘supersize,’’ automate, and increase the velocity of traffic flows where practical. For example, railroads have offered trainload service to grain customers who have built high-speed ‘‘shuttle loader’’ elevators, which dramatically improve the efficiency of transporting grain by rail. At BNSF, for example, a typical grain car in shuttle service hauls approximately 3 times as much grain over the course of a year as a car in non-shuttle service.

Challenges to Freight Mobility and Capacity Expansion

The preceding section details many of the ways that railroads are diligently addressing the capacity issue. However, there are a number of serious impediments to meeting the rail capacity challenge which in many cases have prevented, delayed, or significantly increased the expense of realizing the desired capacity improvements. The National Surface Transportation Policy and Revenue Study Commission, in its final report released in January 2008, stated that, ‘‘Simply put, the Commission believes that it takes too long and costs too much to deliver transportation projects, and that waste due to delay in the form of administrative and planning costs, inflation, and lost opportunities for alternative use of the capital hinder us from achieving the very goals our communities set.’’

The Commission’s point often applies to rail infrastructure expansion projects, including projects that involve little or no public financial participation. Under existing law, a comprehensive regulatory regime preempts state and local regulations (with the exception of local health and safety regulations) that unreasonably interfere with railroad operations. Moreover, detailed environmental reviews, when required, identify the impacts of railroad infrastructure projects and determine necessary mitigation measures. Nevertheless, often some members of the affected local communities still oppose many rail expansion projects, and their opposition tends to be quite vocal and sophisticated. Trains do make noise, rail operations may at times be disruptive to those who live or work nearby, and the regional or national benefits of rail freight service are often not readily apparent to, or deemed important by, the local population. Even those who recognize the benefits of rail freight service may prefer that railroads run their trains near somebody else’s building or through some other town. In many cases, railroads face a classic ‘‘not-in-my-backyard’’ problem. In the face of local opposition, railroads try to work with the local community to find a mutually satisfactory arrangement. These efforts are usually successful. When agreement is not reached, however, projects can face seemingly interminable delays and higher costs. For example, Norfolk Southern had to endure almost 5 years of delay and uncertainty before it was allowed to construct and begin operating its terminal in Austell, Georgia, needed to handle rapidly-increasing intermodal traffic within the region. More recently, Union Pacific continues to suffer delays in double-tracking its Sunset Corridor in Arizona due to issues with a state agency.

Strong local opposition can delay a project so long that costs go up

Often, local communities allege violations of environmental requirements to challenge the proposed project. Railroads understand the goals of environmental laws, and appreciate the need to be responsive to community concerns, but community opposition to rail operations can serve as a significant obstacle to railroad infrastructure investments, even when the opposition has no legal basis. These types of delays can have significant negative affects on the costs of rail projects, and, in turn, the ability of railroads to respond to service requests. Based on railroad cost index data from the AAR, just in the 5-years from the first quarter of 2003 through the first quarter of 2008, railroad wage rates rose 15%, wage supplements (fringe benefits, such as health insurance for employees) rose 11%, and the cost of materials and supplies (which includes such items as rail, crossties, and ballast) rose 52%

Railroads will continue to advocate that the time required for these review processes be shortened without adversely affecting the quality of that result, but until that happens, rail expansion projects will often be delayed unnecessarily.

Today’s Earnings Pay for Tomorrow’s Capacity

As described above, the railroads are diligently doing everything they believe to be prudent to maintain and expand their capacity to provide service, including committing record levels of investment.

It is important to note that because U.S. freight railroads are overwhelmingly privately owned and must finance the vast majority of their infrastructure spending themselves, capacity investments are accompanied by substantial financial risk. As the Government Accountability Office noted in a recent report, ‘‘Rail investment involves private companies taking a substantial risk which becomes a fixed cost on their balance sheets, one on which they are accountable to stockholders and for which they must make capital charges year in and year out for the life of the investment.’’

Accordingly, railroad capacity investments must pass appropriate internal railroad investment hurdles—i.e., the investments will be made only if they are expected to generate an adequate return. For this reason, adequate rail earnings are critical for capacity investment. As the Congressional Budget Office (CBO) has noted, “As demand increases, the railroads’ ability to generate profits from which to finance new investments will be critical. Profits are key to increasing capacity because they provide both the incentives and the means to make new investments.’’ If a railroad is not financially sustainable over the long term, it will not be able to make capacity investments to maintain its existing network in a condition to meet reasonable transportation demand, or make additional investments in the replacement or expansion of infrastructure required by growing demand.

Statements about railroads’ ‘‘record profits’’ often ignore the fact that rail profitability in earlier years was relatively poor. Thus, an improvement from earlier years may be a ‘‘record,’’ yet still fall short of the earnings achieved by most of the other industries against which railroads compete for capital. In fact, that is the case with the rail industry. Rail industry profitability has consistently lagged most other industries—and that is still the case today.

Return on equity (ROE) is a common profitability measure. According to data compiled by Value Line (a financial information firm), the ROE for the U.S. freight rail industry in 2006 was 14%—possibly the best ROE it has ever had. (Value Line’s railroad universe includes BNSF, CSX, CN, CP, KCS, NS, UP, and Genesee & Wyoming.) By contrast, the median ROE in 2006 for the 89 industries (encompassing around 1,700 firms) for which Value Line calculates ROE was 16.2%. In 2006 railroads tied for 57th among the 89 industries for which Value Line calculates ROE. Value Line data for 2007 indicate that the railroad median (14%) again fell well short of the median for all industries (15.8%).

So while recent years may have been the best financial years ever for railroads, they have not been sufficient to bring railroads even to the mid-point among all industries, and the need for financial sustainability is as pronounced today as ever before—especially in view of the projected investment requirements the industry will be facing.

According to the Cambridge Systematics study noted earlier, an investment of $148 billion in 2007 dollars (of which $135 billion is for Class I railroads) will be necessary for rail infrastructure expansion to keep pace with economic growth, meet the DOT’s forecast demand, and maintain (but not grow) rail’s current market share.

That expenditure is in addition to the hundreds of billions of dollars necessary over this period to maintain and replace existing rail infrastructure, and to maintain and replace locomotives, freight cars, and other equipment.

Class I railroads are anticipated to be able to generate (through earnings growth from the additional traffic and productivity gains) only $96 billion of the $135 billion needed for new capacity identified by the Cambridge Systematics study. That leaves a funding shortfall that could be covered by tax incentives for rail infrastructure investments, public-private partnerships, or other means. Railroads will continue to spend significant amounts of their own funds to address the capacity challenges described above. However, they are, and will continue to be, unable to pay for all of the capacity that would be required to serve all shippers’ needs all of the time. Since the amount of rail capital available for investment is limited, investment decisions in these circumstances focus on which investments to choose between, rather than solely whether a specific investment should be made. In such cases, those investment decisions should be based on projected returns that will most favor the long-term sustainability of the rail network.

Public Involvement in Freight Rail Infrastructure

Investment Freight railroads will continue to spend massive amounts to improve and maintain their systems. But even with their improved financial performance, funding constraints will likely prevent railroads from meeting optimal future rail infrastructure investment needs entirely on their own. This funding shortfall means that many rail projects that would otherwise expand capacity and improve the ability of our Nation’s farms, mines, and factories to move their goods to market; speed the flow of international trade; relieve highway congestion; reduce pollution; lower highway costs; save fuel; and enhance safety will be delayed—or never made at all. I respectfully suggest that it is in our Nation’s best interest to ensure that optimal freight railroad capacity enhancements are made. Policymakers can help address the rail capacity funding gap in several ways:

Rail Infrastructure Tax Incentives. S. 1125/H.R. 2116 (the ‘‘Freight Rail Infra structure Capacity Expansion Act of 2007) calls for a 25% tax credit for investments in new track, intermodal facilities, yards, and other freight rail infrastructure projects that expand rail capacity. All businesses that make capacity-enhancing rail investments, not just railroads, would be eligible for the credit. The budgetary cost of a rail infrastructure tax credit (ITC) would be about $300 million per year, but the stimulatory benefit to the economy would be much greater. U.S. Department of Commerce data indicate that every dollar of freight rail infrastructure investment that would be stimulated by a rail infrastructure ITC would generate more than $3 in total economic output because of the investment, purchases, and employment occurring among upstream suppliers. We estimate that new rail investment induced by a rail ITC would generate approximately 20,000 new jobs nationwide. The AAR gratefully

Short Line Tax Credit. Since 1980, more than 380 new short lines have been created, preserving thousands of miles of track (much of it in rural areas) that may otherwise have been abandoned. In 2004, Congress enacted a 50 percent tax credit (‘‘Section 45G’’) for investments in short line track rehabilitation. The focus was on assisting short lines in handling the larger and heavier freight cars that are needed to provide their customers with the best possible rates and service. Since the enactment of Section 45G, hundreds of short line railroads rapidly increased the volume and rate of track rehabilitation and improvement programs. For example, the replacement of railroad ties, a key component of handling heavier cars, has increased by half a million ties per year in both 2005 and 2006 as a result of the credit. Unfortunately, Section 45G expired in 2007. Pending legislation in Congress (S. 881/H.R. 1584, the ‘‘Short Line Railroad Investment Act of 2007’’) would extend the tax credit and thus preserve the huge benefits it delivers.

Public-Private Partnerships. Public-private partnerships (PPPs) reflect the fact that cooperation is more likely to result in timely, meaningful solutions to transportation problems than a go-it-alone approach. Without a partnership, projects that promise substantial public benefits in addition to private benefits are likely to be delayed or never started at all because it would be too difficult for either side to justify the full investment needed to complete them. In contrast, if a public entity shows it is willing to devote public dollars to a project based upon the public benefits that will accrue, the private entity is much more likely to provide the private dollars (commensurate with private gains) necessary for the project to proceed. Partnerships are not ‘‘subsidies’’ to railroads. Rather, they acknowledge that private entities should pay for private benefits and public entities should pay for public benefits. In many cases, PPPs only involve the public contributing a portion of the initial investment required to make an expansion project feasible—with the railroad responsible for funding all future maintenance to keep the infrastructure productive and in good repair. Perhaps the most extensive rail-related public-private partnership envisioned today is the Chicago Region Environmental and Transportation Efficiency Program (CREATE), a $1.5 billion project involving the State of Illinois, the City of Chicago, and major freight and passenger railroads serving the region. CREATE’s goal is to modernize and improve transportation in the region by separating tracks and highways to speed vehicle travel and reduce congestion and delays for motorists; updating track connections and expanding rail routes to reduce transit times; and adding separate, passenger-only tracks in key locations to remove bottlenecks that have slowed passenger and freight movements in the region for decades. The $330 million first stage of CREATE recently got underway.

Say No to Reregulation. Prior to 1980, decades of government over-regulation had brought U.S. freight railroads to their knees. Bankruptcies were common, rates were rising, safety was deteriorating, and rail infrastructure and equipment were in increasingly poor condition because meager rail profits were too low to pay for needed upkeep and replacement. Recognizing the need for change, Congress passed the Staggers Rail Act of 1980, which partially deregulated the rail industry. The record since Staggers shows that deregulation works. Since 1981, rail traffic is up 95%, rail productivity is up 163%, and average inflation- adjusted rail rates are down 54%. And rail safety is vastly improved— the train accident and employee injury rates have plunged since Staggers. Our privately-owned, largely deregulated freight railroads competing fairly in the transportation marketplace have produced the best freight rail system in the world. It is the best for shippers in price and service; best for employees in compensation and safety; and best for the public in reduced pollution and highway gridlock.

Despite the severe harm excessive rail regulation caused prior to Staggers and the enormous benefits that have accrued since then, legislation has been proposed—most recently, S. 953/H.R. 2125 (the so-called ‘‘Railroad Competition and Service Improvement Act of 2007’’) in the 110th Congress—that would reregulate railroads.

Reregulation is bad public policy and should be rejected. It would prevent railroads from earning enough to make the massive investments a first-class rail system requires. Under reregulation, rail earnings, and therefore rail spending on infrastructure and equipment, would plummet; the industry’s existing physical plant would deteriorate; needed new capacity would not be added; and rail service would become slower, less responsive, and less reliable. By perpetuating the myth that service to a shipper by a single railroad is equivalent to unconstrained market power, proponents of reregulation ignore the reality that railroads face extensive competition for the vast majority of their business—including when a customer is served by only one railroad. Railroads do not oppose competition. There is plenty of it out there already, either between two or more railroads, from trucks and barges, or from other competitive forces. And where the marketplace cannot support more than single railroad service, legal safeguards exist to protect against anti-competitive railroad behavior. The current system of rail regulation works. It allows shippers to pay the lowest possible rates consistent with a privately-owned rail system. It makes no sense to destroy the best freight rail system the world has ever seen in order to move toward a discredited system that failed in the past and would fail again in the future.

Public investment in freight rail infrastructure projects is justified because the extensive benefits that would accrue to the general public by increasing the use of freight rail would far exceed the costs of public participation.

Fuel efficiency—Railroads are three or more times more fuel efficient than trucks. In 2007, railroads moved a ton of freight an average of 436 miles per gallon of fuel. If just 10% of the long distance freight that moves by highway moved by rail instead, fuel savings would exceed one billion gallons per year.

Highway congestion—Highway gridlock already costs the U.S. economy more than $78 billion per year just in wasted fuel and time, according to a study by the Texas Transportation Institute. But because a typical train takes the freight of several hundred trucks off our highways, freight railroads reduce highway gridlock, the costs of maintaining existing highways, and the pressure to build costly new highways. • Pollution—The EPA estimates that for every ton-mile of freight carried, a train typically emits substantially less nitrogen oxides and particulates than a truck. • Safety—Fatality rates associated with intercity trucking are eight times those associated with freight rail transportation. Railroads also have lower employee injury rates.

Freight railroads should not be asked to pay for capacity increases needed to accommodate passenger service. These principles are grounded in the tremendous importance of freight railroads to America’s producers and consumers. Freight railroads lower shipping costs by billions of dollars each year and produce an immense competitive advantage for our farmers, manufacturers, and miners in the global marketplace. If passenger railroads impair freight railroads and force freight that otherwise would move by rail onto the highway, those advantages would be squandered. Moreover, highway gridlock would worsen; fuel consumption, pollution, and greenhouse gas emissions would rise; and our mobility would deteriorate—outcomes that are completely contrary to the goals of expanding passenger rail in the first place.

Senator LAUTENBERG. We spend some $40 billion a year on highways, $15 billion on our aviation system, but little to none on rail. What do you think we could do better to balance the Federal transportation policies, to encourage investment in all modes of transportation?

Mr. HAMBERGER. Well, the difference, of course, for freight railroads is that we are privately owned. So I think it would be most appropriate for the Federal Government to provide an investment tax credit, an investment tax incentive, to encourage even more investment than the industry is already undertaking. As you know, we spent on average about 17 or 18% of all revenue over the last 10 years, on capacity expansion. We have done a survey of our members and if the legislation co-sponsored by Senator Conrad and Senator Smith were to pass we believe that an additional $1.5 billion would be spent just by the railroads on capacity expansion. It’s new capacity.

Government Accountability Office, Freight Railroads: Industry Health Has Improved, but Concerns About Competition and Capacity Should Be Addressed, October 2006, p. 56.

REAR ADMIRAL RICHARD M. LARRABEE, (RET.), U.S. COAST GUARD; DIRECTOR OF COMMERCE, PORT AUTHORITY OF NEW YORK & NEW JERSEY

Sustainability, ensuring that we are good stewards of the land, is also a driving factor. One of the agency’s goals is to continue to move more freight from the roads to rail. Although approximately 80 percent of the containerized cargo entering our port stays within the region, a significant and growing portion heads to points west and north. About 13 percent of the port’s cargo moves by rail today, but we are investing nearly $600 million in our on-dock rail infrastructure to increase that proportion to about 20% over the next decade.

Just as airports and highways have a reliable source of funding, so must freight infrastructure. The Highway Trust Fund and Passenger Facility Charge at airports have provided a reliable funding source for systems investments in our Nation’s roads and airports. Seaports and intermodal connections should have a comparable funding mechanism to provide needed systematic investment.

Our freight transportation system is the blood circulation system of our Nation’s economy.

Highway congestion costs over $78 billion a year in wasted fuel and time. One train equals several hundred trucks, and getting trucks off the roads decreases road maintenance costs. Railroads are also 8 times safer, and pollute less.

ASTRID C. GLYNN, COMMISSIONER, DEPARTMENT OF TRANSPORTATION, state of NEW YORK

We are starting to see a disturbing rise in total logistics costs, the first in 25 years. In 1980 logistics costs were approximately 16 percent of the GDP. They had dropped to less than 9 percent a few years ago, a significant spur to economic growth. Now we are headed in the opposite direction, with logistics costs at about 10 percent, and this estimate is prior to the recent and dramatic changes in fuel costs.

As a Nation, we rely upon a legacy of 300 or more years of transportation investment to deliver the promise of an economy of the future. Our most recent major investment, the 50-year old interstate highway system, was laid on top of a 19th century rail system. As a direct result of that Federal investment, the rail system adapted and shrank, leaving thousands of modal disconnects that would be unjustifiable and inconceivable if the network were designed today. The reduction in rail track mileage, the increase in rail traffic (both passenger and freight), and changes in the operating strategy of the freight railroads have resulted in more and longer trains operating at reduced speeds, creating more conflicts with highway movement, increased safety risks, bifurcation of communities, and exacerbation the problems of urban traffic circulation. Some of the best-known freight projects or programs—the Alameda Corridor, CREATE, and the Seattle-Tacoma FAST Corridor—are largely grade separations and crossing upgrades that also benefit highway operations and safety. In areas fortunate enough to have robust commuter rail and inter-city passenger rail, the conflicts are between passenger and rail customers each trying to use the same constrained system.

The nation’s gateway seaports and other major modal and intermodal freight traffic generators established over the past three centuries are now embedded in densely populated urban areas. Most cannot be moved. Their efficiency has been compromised by the characteristics of their surroundings which present obstacles to linking with these important freight gateways with the national highway and rail systems. The lack of connectivity leads to substantial negative environmental impacts on local communities. Many of those negative impacts can be mitigated by improving the transportation connections between these freight gateways and the core national transportation system. Deficient intermodal connectors were identified at the time the National Highway System was designated in the mid-1990s. In the decade since there has not been a systematic, national strategy to address the local burden of transportation facilities which provide national benefits.

PAUL R. BRUBAKER, ADMINISTRATOR, RESEARCH AND INNOVATIVE TECHNOLOGY ADMINISTRATION, U.S. DEPARTMENT OF TRANSPORTATION

The multi-state international makeup of supply chains, coupled with the fact that much of the infrastructure is owned and operated by multiple public and private entities, will require the establishment of public-private partnerships, cooperations, and better institutional arrangements in order for the Department to achieve its goals.

Changes in demographics, manufacturing, and warehousing, and a dramatic increase in imported manufactured goods and foods, have caused freight funneling at major gateway ports, leading to congestion on the highways and at the rail connections as containers are reloaded on trucks and rail cars. Private sector changes in inventory management and production operations are placing demands on the transportation system that go beyond connectivity to speed, reliability, and throughput. Logistics costs have been rising for some time. As reported by the Council of Supply Chain Management Professionals, logistics costs as a percent of gross domestic product have increased 63 percent since the beginning of 2004.

Moreover, all the freight modes have responded effectively to shipper requirements, providing more frequent service of smaller shipments to accommodate their demands for Just-in-Time deliveries of freight that allow reductions in inventories and logistics costs.

Many long-distance trucking firms use GPS transponders on their cabs to track their assets; this allows businesses to maintain continual awareness of asset movement. Through a collaborative agreement with the American Transportation Research Institute, we can tap into GPS data from over 350,000 trucks that are traversing our Nation’s roadways on any given day. We hope to expand this data to include over 400,000 trucks by 2009. We use this data to calculate travel speed and time reliability throughout twenty-five corridors across America. This helps the Department gain insight into system performance, so that we can better focus our efforts in increasing network capacity. These system performance measures allow every entity involved in transportation, public and private, to better manage its resources.